During the pandemic, the total amount of deposits in the banking sector grew substantially. Total deposits grew 26% from $15.8T in Q1 2020 to a peak of $20.0T in Q1 2022, leaving the majority of banks with excess deposits – more deposits than loan demand. Now that total deposit levels are declining, the balance may swing the other way, and we may find ourselves in a situation where the majority of banks are in serious need of funding.
Taking a look at historical data, we find the balance between banks with excess deposits and banks that need funding has varied over time. Defining which banks have excess deposits is tricky because it depends on unrecorded loan demand, but a simple heuristic is to compute the fraction of banks where loans account for less than two-thirds of their assets. Many of these banks would prefer to make more loans if they had the opportunity. The figure below displays the fraction of banks with excess deposits since 2000. In Q1 2022, coming out of the pandemic, 71% of banks had excess deposits. As of Q2, many banks are still flush with deposits, but the trend is going the other way.
If the trend continues, the fraction of banks with excess deposits will fall below 50%, and the majority of banks will instead be in need of funding. The fraction of banks with excess has fallen to ~40% on two occasions over the past 22 years. However, if the historical data is any guide, the banking sector will likely remain somewhat balanced between banks with excess deposits and banks that need funding.
Current rates
Change from four weeks ago
Sources: Deposit data in paragraph 1 and the figure provided by the FDIC. FHLB Advances are an average of FHLB Boston, FHLB Chicago, and FHLB Des Moines. Brokered CDs are an average of Fidelity and Vanguard. Listed CDs provided by National CD Rateline. US Treasurys and LIBOR provided by WSJ. SOFR provided by CME.
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